Business Description After taking business classes, Jake, an avid dog-lover, dec
ID: 2517771 • Letter: B
Question
Business Description
After taking business classes, Jake, an avid dog-lover, decided to start selling unique pet supplies at trade shows. He has two products:
Product 1: "Launch-it"- a tennis ball thrower that will sell for $10.
Product 2: "Treat-time"- an automatic treat dispenser that releases a treat when the dog places his paw on the pedal. The treat dispenser will sell for $30.
Costs: Jake has hired an employee to work the trade show booths. The work contract is $1,000 per month plus a commission equal to 10% of revenue. Jake will also spend $500 per month on trade-show entry fees. Jake is purchasing the products from a supplier in Mexico. Launch-its cost $1 each; Treat-times cost $7 each. Shipping and handling on the Launch-its will cost $2 each; Shipping and handling on the Treat-times, which are heavier, will cost $8 each. The shipping and handling costs will be paid by Jake, not the customer.
Assume Jake expects to sell 200 Launch-its and 100 Treat-times during his first month of operations (June).
Jake's financial goal is to earn an operating income of $8,000 per month. He believes volume may grow at a rate of 5% a month.
Directions
You have been hired by Jake to build a CVP model that will help him understand the impact of business conditions on his operating income. (See "Starting File" worksheet.) In your model, all of the original assumptions will be listed in one area of the spreadsheet (blue box). All other calculations in the model will reference the assumptions (blue box) such that if any assumption changes, the effect will ripple through the entire model. To accomplish this goal, you will use FORMULAs, rather than numbers, in every other cell in the worksheet. In other words, the only place you will type numbers is the blue assumptions box.
FORMATTING conventions to use throughout project:
- Round all UNITS to the nearest whole unit. Use the "decrease decimals" button on your tool bar rather than the Rounding function.
- Show all MONETARY amounts as dollars and cents. Round to the nearest cent. ($x.xx). Use the "decrease decimals" button rather than the rounding function.
- Show all percentages as %, not as decimals. (x%, not .xx)
- Right justify all cells (numbers should be to the right side of the cell, not in the middle or left)
1) Complete the assumptions (blue box) based on the data about Jake's business. Identify and list all variable costs separately and all fixed costs separately before finding the total for each type of cost.
2) Complete the Product Analysis (yellow boxes) assuming Jake only sells either Product #1 (Launch-its) OR Product #2 (Treat -times).
Check figures: B/E Product #1 = 250 units; B/E Product #2= 125 units
3) Complete the pro forma CM Income Statement for the month of June (green box). HINT: On product line income statements such as this, the fixed costs are only listed in the total column. Make sure you also show the totals for all other line items. Finally, calculate the overall weight average contribution margin (WACM) % for the company.
Check figure: Operating income = $900 WACM% = 48%
4) Calculate the WACM per unit (in orange box).
Check figure: WACM/unit = $8.00
5) Use the WACM/unit to calculate the TOTAL number of units needed to breakeven (TOTAL column in the first gray box). THEN, calculate the number of EACH type of product needed to breakeven. Finally, calculate the sales revenue associated with this volume for EACH product, and then the sales revenue to breakeven in total.
Check figures: B/E Product #1 = 125; B/E Product #2= 63
6) Use the WACM/unit to calculate the total number of units needed to achieve Jake's target profit (TOTAL column in the second gray box). THEN, calculate the number of EACH type of product needed to achieve the target profit. Finally, calculate sales revenue associated with this volume for EACH product, and then the sales revenue in total.
Check figures: B/E Product #1 =792; B/E Product #2= 396
7) Calculate the margin of safety (MOS) using June sales as the expected sales (purple box). Calculate the MOS in terms of sales revenue and as a percentage. Also calculate the current operating leverage factor (round to the nearest 2 decimal places) and use it to determine the expected percentage change in operating income stemming from an expected change in sales volume.
Check figures: MOS%= 38%; Operating leverage factor= 2.67
ASSUMPTIONS Product #1: Launch-it Sales price per unit Variable costs per unit: Total variable cost per unit Monthly volume Product #2: Treat-time Sales price per unit Variable costs per unit: Total variable cost per unit Monthly volume Fixed costs per month: Total fixed costs per month Target profit per month Expected change in volume (%)Explanation / Answer
ASSUMPTIONS Product #1: Launch-it Product #2: Treat-time Sales price per unit 10 Sales price per unit 30 Variable costs per unit: Variable costs per unit: Product cost 1 Product cost 7 Shipping & handling 2 Shipping & handling 8 Sales commission (10*S.P) 1 Sales commission (10*S.P) 3 Total variable cost per unit 4 Total variable cost per unit 18 Contribution /unit(10-4) 6 Contribution /unit(30-18) 12 Monthly volume 200 Monthly volume 100 Fixed costs per month: Work contract 1000 Trade show entry fees 500 Total fixed costs per month 1500 Target profit per month 8000 Expected change in volume (%) 5% Product #1 Launch-it Product #2 Treat-time Unit CM 6 Unit CM 12 CM %=6/10= 60% CM %=12/30= 40% Breakeven point: Breakeven point: -in units=1500/(10-4) 250 -in units(1500/(30-18)= 125 -in sales revenue(250*10) 2500 -in sales revenue(125*30) 3750 Target profit volume: Target profit volume: -in units(1500+8000)/(10-4)= 1583 -in units(1500+8000)/(30-18)= 792 -in sales revenue 15833 -in sales revenue 23750 (1500+8000)/60%= (1500+8000)/40%= Jake's Pet Supplies Pro Forma Contribution Margin Income Statement For the month ending June 30 Monthly volume 200 100 Product #1 Product #2 Total Sales price 2000 3000 5000 Less: variable costs 800 1800 2600 Contribution Margin 1200 1200 2400 Less: Fixed costs 1500 Operating income 900 WACM % (2400/5000) 48% Calculation of Weighted average CM per unit Product #1 Product #2 Total CM/unit 6 12 18 Sales mix (# sold of each) 67% 33% 100% Contribution margin 4 4 8 WACM/unit 4 4 8 Multiproduct Breakeven point: Product #1 Product #2 Total -in units 1500/8 125 63 188 Sales revenue at breakeven 1250 1875 3125 Multiproduct Target profit point: Product #1 Product #2 Total -in units (1500+8000)/8 792 396 1188 Sales revenue at target profit 7917 11875 19792 (* selling price/unit) Margin of Safety (in $) 6667 10000 16667 (Actual sale-BES) Margin of Safety % MOS/Actual sale) 84% 84% 84% Operating Leverage Factor Contn/Opg.Income 1.33 1.33 2.67 Expected % change in operating income (%)(OPL*5%) 6.67% 6.67% 13.33%
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